Video #1 - Japanese Banking Mergers

Monday, January 03, 2005

sources | lesson plan

BACKGROUND INFORMATION

During September, The Dai-Ichi Kangyo Bank ("DKB"), The Fuji Bank("Fuji") and The Industrial Bank of Japan ("IBJ") consolidated their assets to form a new financial services group ("the New Group"). It was the biggest merger ever of Japanese financial institutions.

Yoshiro Yamamoto is credited as the engineer of this merger, which has created the world's biggest global financial services organization with 1.2 trillion yen (?) in assets. It will dominate corporate lending and an array of wholesale and investment banking services at home. The New Group has the goal of becoming one of the top five money-center banks in the world over the next several years. It aims to challenge Citibank, Deutsche Bank and HSBC.

Mr. Yamamoto is the president of Fuji Bank and is one of the most influential figures of Japanese banking. He was interviewed by Business Week Asian Economics Editor Brian Bremner on September 24. When asked why merge, he responded that there were three reasons: "...efficiency, expansion of business portfolio and the demands of information technology spending." He added: "Japan is overbanked, each bank is a player in the wholesale securities business, a market where we want to expand more. In Japan, you need 300 billion yen ($2.8 billion) to be a factor, too much for each bank alone. One of the other growth areas will be pension management. We can be competitive if our efforts are combined... I also wanted to change our business portfolio. We couldn't simply just continue to serve big corporate borrowers in a traditional manner."

Mr. Yamamoto continued: "We want to create a brand new culture - compensation and human resources. Last July, Fuji abolished its seniority-driven compensation system in favor of salaries and bonuses being tied to individual performance and talent. This will be the policy of the New Group. The second element of the cultural revolution is that when the holding company is finally established, there will be three major business units focused on consumer or retail banking, corporate banking and investment banking and wholesale securities. They will target specific returns on equity. They will be competing against each other."

He continued: "Japan has been group oriented. This has held back some individual talents. Japan has placed too much emphasis on equality. In the future, we will be performance oriented. If you think of the U.S. and take it too far, you might end up with too many people losing their job security in Japan. I personally don't believe in that. What we need in Japan is a better balance."

Hakuo Yanagisawa is Prime Minister Keizo Obuchi's choice to head the Financial Reconstruction Commission, with the daunting task of saving the Japanese banking system from collapse. He has fifty lawyers and bank examiners plus the far larger Financial Supervisory Agency staff. They have shut down banks, rammed through tough new regulations and serve as the command center of the Finance Industry.

In an interview for Business Week on September 14, Mr. Yanagisawa predicted that more bank consolidations are likely to occur: "We are pushing structural reform at the same time we are stimulating demand. This has been Prime Minister Keizo Obushi's policy. For long term growth, structural reform is necessary."

Commenting on the "New Group" merger Mr. Yanagisawa said: "The top management of the three banks that have merged are the very people who understand the need for change. To make the merger work, everyone will be fired and rehired to create a new bank." He added: "Another thing has changed too. The fact that a bank has large assets doesn't mean anything. Sheer size doesn't matter, (profit) margins matter. We will focus on profits and forget size. One trillion yen profit is the target so we can compete with Citibank and Deutchebank."

When asked if his office had anything to do with the merger, Mr. Yanagisawa responded: "When we implemented the capital injection program at the end of March, I felt that capital injection should be a tool for more integration. I emphasized that the banks have to change, that you have to take advantage of capital injection with consolidation. There was no direct pressure for the merger, however."

In the same interview, Mr. Yanagisawa assured Business Week that bank examinations for the big banks were complete and that regional banks will be completed by the end of September. He said that banks are looking at the technology industry and are ready to lend.

Questioned about the possibility of Citibank or Deutschebank wanting to buy a Japanese institution, Mr. Yanagisawa described Japanese banks as "attractive" because of their huge deposits. He added that national sentiment would probably resist a high-profile foreign investment but could accommodate a "balanced presence". His final comments were: "If foreign banks bring new services and stimulate competition, that's fine."

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SOURCES:

Harbrecht, Douglas, Ed. "Japan's Banking Boss: 'Size Doesn't Matter. Margins Matter;'" Business Week, BW ONLINE Daily Briefing, September 14, 1999. Harbrecht, Douglas, Ed. "Fuji Bank's Boss Searching for a 'Better Balance.'" Business Week, BW ONLINE Daily Briefing, September 14, 1999.

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LESSON PLAN

GRADE LEVEL/SUBJECT: 10-12/Economics, International Relations, World History, International Bachelaurate Programs(IB), Current Events.

PURPOSE: to present activities to be used at a variety of classroom situations in order to enhance student understanding of Japanese economy and its significance globally.

OBJECTIVES: Students will be able to:

1. explore the present state of Japanese banking.
2. analyze the nature of international banking as it relates to Japan.
3. explain how the state of the banking industry is related to economic recovery in Japan.
4. research similar banking mergers in other nations at different times.
5. create a scenario for the future of Japanese banking.

MATERIALS:

1. Background information provided.
2. Resources on Japan available at your school's Media Center and the Public Library System in your area.
3. Background information available through Internet "search engines".
4. www.dkb.co.jp/English/press/index.html
5. www.ibjbank.co.jp/
6. www.fb.co.jp/
7. www.businessweek.com

ACTIVITIES: May be assigned as group activities or as individual tasks. They may also be designed as preparation for related presentations either by individuals or groups.

1. Research and report on the latest information about the institutions mentioned in the background information sheet and report on the restructuring each has undergone. What has been the result of the changes? Speculate on short term and long term consequences. Students may illustrate this report by using graphs and charts. (News release on the merger is posted in each of the bank's web sites is listed in the Materials section.)
2. Compare the global role of Japan's financial institutions before 1997 and in the present. Another opportunity to use charts and graphs as illustrations.
3. Research and report on the differences and similarities between the Federal Reserve System in the United States and the Financial Reconstruction Commission in Japan.
4. Use charts and graphs to illustrate the role of government regulations on the banking industry and its consequences for the overall economy of Japan.
5. Compare and contrast recent bank mergers in the United States with their counterparts in Japan. Evaluate the short-range and long-range effect on the economies of both nations.
6. Write an editorial for the newspaper expressing your views on the banking mergers.
7. Role play the parts of important players in this crisis: The CEO of a securities corporation, the president of a bank, a consumer who needs a loan to buy a home, the head of the banking regulatory agency, etc... Hold a panel discussion where these people can answer questions and explain their positions on the issues at hand.
8. Open your own bank. Organize operations to meet the restructuring being forced by the changes in the economy.
9. Write editorials from the point of view of a variety of individuals at different strata of Japan's economy. Express how each is affected by the stagnant economy and the subsequent banking crisis. Ex. Someone trying to purchase his or her first home; the owner of a small business; an unemployed professional; an unemployed laborer; a woman in the work force etc.

EVALUATION: Individual assignments should be graded by the teacher using established criteria. Group activities, presentations and projects may be evaluated by teachers and students using the following criteria and scale:

Content 1= Superior (A) Creativity 2= Excellent (B) Clarity 3= Good (C) 4= Fair (D) 5= Poor (F)

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